There is a puzzle in financial markets. At the heart of it is a simple question: Where the heck are the bond vigilantes?
The bond vigilantes were reputed to be so powerful that James Carville, an adviser to then U.S. president Bill Clinton, famously joked that he no longer dreamed about being reincarnated as the pope or the president or a baseball slugger. Nope, he now wanted to come back as the bond market, because then “you can intimidate anyone.”
The non-partisan Congressional Budget Office estimates the U.S. federal deficit next year will stand at an alarming 6.1 per cent of gross domestic product. The International Monetary Fund thinks the gap will be even larger – around 7.1 per cent of GDP. But maybe that has things backward. If you’re looking for a simple explanation of why the U.S. and global economies have been so resilient over the past year, the most obvious explanation is that Washington has been footing the bill for the good times.
These forecasters may be assuming that Washington has more room to run big deficits that any of us thought possible back in the 1990s. They can point to Japan, which has done all right in recent years despite carrying a debt-to-GDP load twice as large as that in the U.S. The problem with these rationales for big deficits is that none of them seem to fit the U.S. situation exactly.over the next couple of decades, taking the world's leading econ-If current policies are maintained, U.S. government debt will soaromy to levels of indebtedness it has never before experienced.If current policies are maintained, U.S.